Thursday, 2 September 2010

The Property Bubble & Investment Trap Part V - What now, after the control measures?

By now, all these news reports about the newly announced control measures by the MND Minister to cool the red hot property market must have sank into the minds of all keen buyers and sellers of residential properties, "owner-occupier" and "fully leveraged" investors alike, including the keen readers of my blog. These control measures, their implications and complications are all well covered by the various media. It is not the purpose of this posting to regurgitate them. There is also a good commentary, "Finally, some cooling measures with bite" about these control measures in Today (31 Aug, 2010) by Mr Colin Tan and a few other letters in TODAY's forum page [(1) Three years enough, (2) Nest egg delayed, (3) Minimum Occupation Period doesn't hit the spot] to highlight possible complications during implementation. You may spend some time to read them if you wish. I have also uploaded summaries from both Straits Times and Mypaper for easy reference.

The last two days, I had combed through all these reports, to read and watch from a perspective; as if something could have been missed out or had not been commented yet.

Essentially, these anti-speculation measures are against the "over-leveraged" investors and "speculators" but are good for genuine "home-occupier" investors (unless they are already caught by the trap of high prices). [I do hope more who visit my blog are "home-occupier" investors and not speculators.] As one analyst said, the control measures could have been worst, as compared to the measures taken by the China Authorities. As the 2 rounds of introductory measures within the last year were insufficient, the measures just implemented are just like the "first dose of antibiotics" your doctor had given to deter the "super-bugs". If the this dosage is ineffective, the next dose will be given and may be ultimate to see a major correction in the property market.

The control measures did not come as a surprise to me, including what the PM had announced during the N-Day Rally that the monthly income ceiling would be raised for the "sand-witched" class, from $8,000 to $10,000. The fact that he had spoken so during the Rally, and not left to MBT, must have added weight and meant there should be some political capital to gain. I expect this to impact on the growing EC and mass private condo market, i.e. 99 leasehold ones. [I will elaborate on this later on.]

Now that the control measures had been announced, what now for the property market and those who are keen to "invest"? Those who might have already committed on an expensive purchase recently might have been caught off guard by this "caught-off-guard" MND Minister. "WAIT-AND-SEE" must be the prevailing "herd instinct" or even "strategy" at this current moment. This is RIGHT. I am sure the whole market will consolidate, but by how much and which category(ies) will be more affected?

Just like any previous anti-speculative action plan, this round of control measures is so called "pre-emptive" by the MND Minister (although I consider it a bit too slow). What it does is just like the "re-set button" in your favourite computer game. It brings all buyers and sellers back again to a new "common base" to see where the forces of "demand and supply" will carry them again in the next game. Those who are familiar with Othello or Reversi board game will know that in the early part of the game, it does not matter if the  opponent flip too many chips of his chosen colour in his favour. You can "lose" at the first part of the game, but ultimately when you control the "corners", you can win by flipping back more chips of your opponent to your own chosen colour. This analogy explains the current property market and those who already bought with "high prices" are just the same like the early Othello winner. The problem is that as a "homeowner" investor, you can place only one chip, so when you place your chip, you must aim to "control a corner" and "to flip as many as you can later on to your colour if you do have another chance with another chip".

This brings me to the new "helicopter" vision you must have now to know "how to land" [what price] and "where to land"[what property] in your strategy. You may recall in my first and second postings, [ "The Property Bubble and Investment Trap", and Part II ]; I tried to give you this "helicopter" vision of the property market maze that was before the announced control measures, and way back from the 1996 peaks. I hope this had painted you a profile of the whole property market in Singapore.

The new control measures like a "reset" button will now set in new "push" and "pull" drivers to both the "DEMAND" and "SUPPLY" sides of the PRICE equation until a new equilibrium is reached.

You may recall I had said in an earlier posting, one reason for me to doubt about the sustainability of high prices of the current market is that the HDB and private property sub-markets are all bundled and messed up as one whole with prices getting ridiculous, and accentuated by a benchmark of $200 psf on which developers are asking and driving up their prices, while our GOVT is stuck with the "market subsidy" argument. Hence, the sandwitch class earming $8,000 ~ $10,000 was somehow forced into the mass private condo market (99 leasehold) with corresponding high pricing in HDB re-sale market, DBSS and EC markets working in tandem. It ended up with all sectors chasing a $200 psf higher benchmark which was obvious as compared to the highs of 1996 prices. Considering cost of investment (interest), a $100 psf benchmark could have been more reasonable and perhaps even sustainable in the longer run. With stagnation of income and the younger age group having lesser CPF while cost of living is ever rising and inflationary, it is clearly no more an "investment" but becomes a "re-engineered" enslaving model for the "home-occupier" investors. It is not making sense even as a long-term investment; if I need to liquidate later on for retirement.

The price mechanism and equation is shaped by the market profile on the Supply side and your own personal risk profile on the Demand side.

What shapes the market profile on the SUPPLY side?
(a) Number of units the HDB and/or Developers are releasing into the market
(b) Land supply by GOVT and bidding by Developers and Contractors

What shapes the risk profile of the Buyers and Sellers on the DEMAND side?
(a) Income elasticity ( wage increase, sustainable employment and CPF )
(b) Control measures (anti-speculation or pro-market)
(c) Stock market
(d) Mortgage financing / interest rate
These factors affect the liquidity of the market.

If the property market is purely based on "free market" mechanism, the free market forces of Demand and Supply will rein and an equilibrium price will be reached for each category of property. With inherent economic drivers influencing and shaping the market, now we have the Govt intervening the market with Supply and Control Measures. The market in itself is already not purely free market due to Govt's housing policies on homeownership and "asset enchancement" and other HDB policies.

I maintain the best way to control prices to make HDB flats affordable is to keep two distinct segregated markets, with HDB controlling and managing buy-back at costs plus markup for one market, and leaving the other market for those who believe in "investment on HDB flats" to contend with the private property market and free market forces of Demand and Supply. [Read my post here : How To Ensure Affordable Low Cost Housing?]. But that would probably mean killing the DBSS or EC schemes, which the HDB and the Govt have an interest in these schemes. I will explain why later.

I had commented in the last posting that it is bad to have the HDB and private property market all bundled and messed up as "one whole", like a stack of poker cards propping up one another in a pyramid formation, especially when the prices get ridiculous. My own opinion is that the present set of control measures will "shake up" the whole property market and try to bring the sub-markets back to their distinct classes of property and fair pricing (whether for homeownership or  investment). This is good  where prices were already distorted for the mass market, particularly for EC and 99 LH condo. Capping at $8000 household income for HDB flat eligibility had forced buyers to enter the  99 LH mass condo market willingly or unwilling and to a join a speculation fray chasing a $200 psf higher price benchmark ... but income seems to be stagnant and definitely uncertain, hence unsustainable. Honestly, tell me after listening or following up on the N-Day Rally, do you see any clear directions where and how our own economy would take us even if our leaders can switch it to an auto-pilot mode with 3% productivity gain? If it is so calm and cool as presented by the PM, perhaps we would not even need these control measures first of all. The GOVT could have made a hefty sum just from land sales and argued the market is sustainable.

Raising the household income cap to $10,000 for DBSS flats will consolidate prices for DBSS flats. What to watch is the supply released by the HDB. If the degree of price correction is substantial in the mass private condo (99 LH) market, EC may be even price out of the market since EC carries the same restrictions as HDB flats. So owner-occupiers should buy EC to enjoy accompanying benefits but not fully-leveraged investors. The price of EC will then reach its equilibrium considering its pros of an available "subsidy" but cons of HDB sale "restrictions", but yet it has to differentiate and distinguish itself from the DBSS, the only diffrence being in condo facilities and security. Hence, I would see this posing great pressure on the private condo (99 LH) mass market. With the new control measures, short medium-term investment (3~5 years) seems out until one day when these restrictive measures may be removed. Any investment must therefore be considered in the longer term of 5~10 years. And this ties in with the issue of affordability which in my opinion should be considered as these number of years of combined income less car and maid expenses. My fear is that many are over-levereaged in mortgages, at least 15~20 years long. I will not elaborate here, you may want to search out Mr Tan Kin Lian's Blog, to know why, if you are lost; or if there are specific queries, I may address them in a separate posting later on.

Next, I am going to teach you how to SPECULATE. What ??? SPECULATION? You may think I had gone crazy with these "control measures". Have not these measures killed all the speculators ? No, I have not, I am going to teach you how to SPECULATE on what the price correction might be like and let you see what may not be so visible from the many reports and analyst talks.

If you look at the factors shaping the market profile on the SUPPLY side and risk profile of the Buyers and Sellers on the DEMAND side, you will note what is more visible and what is not.

On List A, the supply of property types is quite clear especially for BTO, DBSS and EC. If you pay attention, data of private condo supply are also available. The GOVT also announced land sales and bids by developers and contractors. These are actually visible to the layman but you may not have paid attention. Therefore, what are not so visible to the layman are perhaps development and construction costs. These are not secret to me and I have watched them for the past 20+ years. On List B, who know best ?Answer - the buyers and sellers themselves.

So for anyone asking me WHAT NOW, AFTER THE CONTROL MEASURES ? Other than telling the above, I must know his "risk profile" and then set him against the other factors influencing the market on the DEMAND side on List B.

Having said that, please leaves me to do some SPECULATION first, on the likely price correction and  where the likely new base price will be. I would like to analyse the data in the two attached articles below, before presenting them in the next posting. Any analyst would probably say the price would correct by at least 5~10%. This is CERTAIN, considering the knee-jerk reaction and fall in property stock counters after the control measures were announced. We also know the mass condo market will see the greatest correction. But if the economy get worse with a "double-dip", a further 5~10% correction is not impossible. Conversely, if the first dosage of control measures doesn't work, such as if there is a sudden flow of foreign funds into our property market, then the GOVT will put in more control measures. Maybe MBT will cut-and-paste measures from China. Do follow up if you are keen.

Reference #1
Straits Times Online Aug 25, 2010
Hoi Hup Realty and Sunway Developments will cite nearby golf course as key selling point
By Joyce Teo

The site, which can be developed into a strata housing community or a condominium project, is on the boundary of the Orchid Country Club golf course. It is not near an MRT station, but it does enjoy an unblocked view of Lower Seletar Reservoir. -- ST PHOTO: ALPHONSUS CHERN

A JOINT venture which has emerged as the top bidder for a condominium site in Yishun is highlighting its location next to a golf course as a key selling point.

The tie-up between Hoi Hup Realty and Sunway Developments put in the best of seven bids for the 99-year leasehold land parcel at Miltonia Close, at the fringe of Yishun Town Centre.

The bid of $165 million, or $405.5 per sq ft per plot ratio (psf ppr), beat market expectations and came in about 31 per cent above the next bid.

Hoi Hup director Wong Sjew Hung told The Straits Times: 'We see the potential of the site. It is really hard to find a site next to the golf course here.

'We plan to build a five-storey condominium with 380 units. It will be mainly two- and three-bedroom units suitable for families.'

A construction firm, Master Contract Services, placed the second-highest bid of $126 million, or $309.68 psf ppr. The third-highest bid from a joint venture between Frasers Centrepoint and Orchard Parade Holdings came very close at $125.32 million, or $308 psf ppr.

Reference #2 :-
Straits Times Online Aug 3, 2010
By Joyce Teo

An artist's impression of the Parc Lumiere development under the Design, Build and Sell Scheme (DBSS). -- PHOTO: SIM LIAN GROUP

SIM Lian Land has topped a tender for a public housing plot in Tampines Avenue 5 released under HDB's design, build and sell scheme (DBSS).

Its higher-than-expected bid of $178.13 million - or $261 per sq ft per plot ratio (psf ppr) - was 22 per cent ahead of the second highest bid from China-based Qingdao Construction (Singapore) of $145.77 million, or $213.6 psf ppr.

In third place came joint venture Hoi Hup Realty and Sunway Developments' bid of $139.9 million, or $205 psf ppr.

The plot attracted five offers, and construction firm Ho Lee Group came last with its $110 million, or $161 psf ppr.

According to Ngee Ann Polytechnic real estate lecturer Nicholas Mak, Sim Lian's offer sets a new land price record for a DBSS site and breaks the previous high of $237 psf ppr set in February 2008 for a Bishan site.

He had expected the tender to draw up to seven bidders with offers of between $160 and $200 psf ppr.


  1. "If it is so calm and cool as presented by the PM, perhaps we would not even need these control measures first of all."

    Pretty much the exact same thing which came to my mind.

    The property market in Singapore is inherently volatile and inclined towards massive booms and busts:

    1) Very low interest rates.
    2) Massive government intervention with very short (or almost no) notice.

    Consider the bigger picture: why did the banks fail to self-regulate? They should be the ones who are most worried, given that they actually have skin in the game.

    What does this imply?

    A healthy and sustainable market requires minimal government intervention. Let Adan Smith's invisible hand do its job.

    Last year, Melbourne experienced a 20% boom from the lows of the GFC. Yet banks would only offer me a 70% loan. Didn't see the Government stepping in to cool things down either. Prices have plateaued out nicely since then.

  2. Asians are rich. Rich Developers are holding back if prices ever fall. With holding power, all will just wait out for the next optimum price level dictated by the market and properties being a limited commodity in such a small space like ours, you think it will stay down for long or will even go south?
    We need clever measures to keep it stable and not artificially drive it down.

  3. @ Anon 4 Sep 15:40

    "Asians are rich."...

    I do not agree with this general statement.

    The problem is they may be made "artificially" rich (to quote your word" - asset rich but really cash poor.

    The problem is compounded by the fact that property is not a homogenous good. There is still a range of asset classes and a price spectrum ... and with HDB flats going so high ... and compounded also by income which I perceive as not rising but stagnant ... I have not seen any "clever measures to keep it" rising. Do you?

  4. Collectively,more and more asians are making inroads into our property market - not just relying on local buyers to support the market. These are usually high nett worth people or people who are financially prudent.
    Unless things went awry here, the compact market, stable and progressive environment makes our housing of great investment value.
    Now why would anyone want to offload their prize possession at a loss when there is potential long term gain?
    Hence, in today's ST, the reporter has rightly called on HDB owners not to sell away something they may not be able to buy back later.
    Will this curtail supply and keep property prices, at worse, stable?
    The potential upside is still there. To artificially suppress it may not be a good idea.

  5. Hi Anon Sep 2010 14:57

    Part I

    I could not understand your arguments clearly.

    Property is not a "simple" commodity. It is also not so simple an "investment" tool like stocks. When "homeownership" becomes an "investment" tool and compounded by a HDB resale market and private residential market; and compounded by Govt policies and controls, the most misunderstood being the "asset enhancement" argument, you may appreciate how complex it is.

    Does your argument of "more and more asians are making inroads into our property market - not just relying on local buyers to support the market...." means the "luxury" property class. This is a unique 'super rich" niche by itself. Your positive sentiment might be right for this "luxury" class property. Their investment decisions are hardly affected by GOVT control measures. I also believe so, if you mean the same. I will probably cover it in a separate blog posting. By their actions supporting the property market, the HDB re-sale or lower class mass condo properties in the mass market is not going to appreciate much in value.

    If your "people who are financially prudent" refers to people investing in mass market condo and perhaps stretch downwards to include EC and then DBSS HDB flats at good location, then your question "Will this curtail supply and keep property prices, at worse, stable?" ... will be met by a "YES" from me, but with the word "at worse" change to "at best" or "at most".

    To support an "upside" which you hope, there must be a "downside" now because the prices are too high for this "mass market". The only positive factor now is low interest rate. But I see this as the greatest trap for all - "innocent" homeowners and even your "high nett worth Asians". And if they are indeed prudent, they will see this trap too...i.e.

    The property market in Singapore is at record high and surpassing 1996 peak when interest rate now is at its lowest, when the whole world enonomy, especially the financial institutions; are all waiting to recover from the worst crisis in decades arising from subprime and minibond woes ... in 1996 peak interest rate was pretty high and not at record low as you see now; mind you. [Somehow those who committed high but with strong holding power were "rescued" by subsequent crisis in a way, I may explain why in a separate posting.]

    Many younger purchasers may not appreciate this is a different game altogether now from before ... especially and if the job market is faced with UNCERTAINTY ... What do I see? ... I see the "potential upside" in an interest rate hike when economy does improve, but CPF will be stagnant and probably income too, and those who committed while prices are at record high would be trapped badly this time. But too bad, if the economy does enter a "double-dip", interest rate is at its lowest, and even with the expiry of any loan lock-in period, they will not enjoy "re-finacing or re-pricing" to cut interest incurred on investment...then at "best" the price is stagnant and not fall.

    Immagine this "tripartite" relationship :-
    (i)DEVELOPERS locked you in in at record high prices for as long as you can drag mortgage.
    (ii)BANKS locked you in on a record low interest rate for now ... they will want to drag you as long as possible especially if the world economy is not supporting them.
    (iii)If YOU are locked in a record high "investment" with record low investment benefit in the adverse economic situation (in the worst, a foreclosure) and rising interest rate hike if the economy improves.
    Now, tell me how you see the Developers and Banks are positioned against YOU?

  6. Hi Anon Sep 2010 14:57

    Part 2 - con'td

    ALL MUST BE CAUTIOUS. You see today, China just announced relaxing controls and encouraging their Insurance Companies to "invest" in properties, not their domestic investors yet, in a property market with less complexity.

  7. I hope you are not from the civil service?
    We need to understand what's going for us in this country or city. Geographically, we have the advantage of much larger cities. So long as we maintain mutually beneficial relatiionship with our neighbors, we will continue to enjoy wide interests in our property market. There is therefore no need to articially suppress prices here because, it will only have short term effect and benefit the rich.

    That said, our immediate problem is that we are dealing with a more and more affluent society who can now afford multiple homes. This development works against people who are new to the property market and our average salary workers. The recent policies changes does not address this long term problems and will only have a knee jerk reaction in housing prices before it will be chased up again. In fact, if home prices dip, it will erase all the negative measures introduced by our government to correct speculative element in the market.

    On the mass market side, investors are beginning to realize they are attractive options and even undervalued.

    Given our limited land space, and better commute connectivity with growing mrt lines, the increase in value should be broad based, not only narrowed to prime areas.

  8. Hi Anon 6 Sep 2010 14:58

    I still cannot read your logic.

    @ "Geographically, we have the advantage of much larger cities." what? You should check with investors who invested high in 1996 (even mid range condos), especially home homeowners. How does it helps?

    I could not understand your argument in Para 2 too. @ "In fact, if home prices dip, it will erase all the negative measures introduced by our government to correct speculative element in the market". What argument and logic is this?

    @"On the mass market side, investors are beginning to realize they are attractive options and even undervalued." - You just failed the maxim of "Watch what they do, not what they say". They are not worth the current high price or even "valuation" espcially for recent launches. They will be attractive options only if the price do dip. If not 5~15% dip due to control measures, then a further 10~15% if economy enter a double-dip.

    @"Given our limited land space, and better commute connectivity with growing mrt lines, the increase in value should be broad based, not only narrowed to prime areas.". Again, I do not see your logic, the property market is not homogenous, and you just can't throw all properties in "one basket" like what you are arguing. The "prime" or "luxury" market is a differentiated niche by itself and will probably stay "untouched" by all these control measures in this round of the game.